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For Asia, Growth Pickup Provides Opportunity for Reforms

October 13, 2017

Asia continues to lead the global economy with strong growth projected at
5.6 percent this year and 5.5 percent in 2018. The strength of many
economies in the region provides an opportunity to pursue key reforms that
can amplify and accelerate their beneficial effects, boosting living
standards for all, said the IMF in its latest regional assessment.

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The IMF’s Regional Economic Outlook: October 2017 Update for Asia and Pacific cites strong consumption and investment, as well as better than
anticipated external demand as driving the pickup in growth. However, with
risks to growth, including rapid credit growth in China, rising
protectionism, and geopolitical tensions, policymakers cannot slow the pace
of reforms.

“Asia is in a favorable position as growth momentum continues to be strong.
It is premature, however, to judge how long this upswing will last. The
tailwinds in the region are an opportunity to pass structural reforms and
address vulnerabilities,” said Changyong Rhee, Director of the IMF’s Asia
and Pacific Department.

Favorable financial climate

Financial conditions in Asia are also favorable thanks to sizeable capital
inflows in the first half of 2017.

While the growth outlook has been revised upward, inflation has been marked
downward to 2.3 percent in 2017—0.6 percentage points lower than previous
projections in April—mainly because of lower commodity prices and
appreciated local currencies.

Strong but uneven growth in region

Overall the region’s pickup in growth can be attributed to
stronger-than-expected growth in China, Japan, Korea, and countries
belonging to the Association of Southeast Asian Nations (ASEAN), which
helped compensate for the weaker outlook in Australia and India.

China—the region’s largest economy—is expected to post a growth of 6.8
percent this year, and 6.5 percent next.
This year’s upward revision reflects continued strong infrastructure
spending and resilience in the real estate sector in the first half of the
year. The country has potential to sustain strong growth
over the next 3-5 years, but this will require speeding up reforms to make
growth less reliant on debt and investment.

India’s
growth slowed in recent quarters due to the temporary disruptions from the
currency exchange initiative—demonetization— that took place in November
2016, and the recent rollout of the goods and services tax. This tax is a
landmark tax reform that should help unify the domestic market and
encourage businesses to move from the informal to the formal sector.

Growth in 2017 was revised downward to reflect the recent slowdown, but is
expected to accelerate in the medium term as these temporary disruptions
fade.

Japan
enjoyed growth sustained above-potential for six consecutive quarters
through the first half of 2017. The country is expected to grow to 1.5
percent in 2017 driven by a pickup in external demand, as well as
consumption supported by fiscal transfers.

Elsewhere, for other countries in Asia and the Pacific, economic prospects
remain strong (see table). In particular, the
“ASEAN-5” of Indonesia, Malaysia, the Philippines, Singapore, and
Thailand
are expected to expand by 4.9 percent this year and in 2018. Strong growth
in these countries is primarily driven by higher investment and exports.

Outlook: risks and challenges ahead

With strong overall growth for the region, near-term risks to the outlook
are broadly balanced. On the plus-side, the cyclical recovery in China and
Japan could be stronger and last longer than expected, driven by stronger
confidence and more favorable market conditions.

But a sudden tightening in global financial conditions could trigger
disruptive capital outflows that would affect particularly those emerging
and developing Asian economies and weaken their growth prospects.

A sharp adjustment in China due to unsustainable policies, further
increases in debt, and mounting financial imbalances also present risks to
the region’s outlook.

Furthermore, as Asian economies are especially vulnerable to protectionism
because of their trade openness and integration to global value chains, a
global shift toward inward-looking policies could suppress Asia’s exports
and reduce foreign direct investment in the region. Escalating geopolitical
risks could also negatively impact the region’s medium-term growth
prospects.

Additionally, over the longer-term, Asia will need to tackle two key
challenges: population aging and lagging productivity growth—a measure of a
country’s efficiency. The robust recovery and fiscal space in some
countries provide an opportunity to offset the short-term costs and build
public support for ambitious structural reforms to tackle the medium-term
challenges.

Policies that reinforce growth

Given these challenges, policies should aim to lift incomes, create jobs,
and make sure growth is shared by all in the region.

The report notes that the mix of subdued inflation and robust capital
inflows to the region provides scope for monetary policies to remain
accommodative, while financial sector policies can be tightened to mitigate
financial stability risks.

To tackle the region’s longer-term challenges of aging, the report also
recommends policies that protect the vulnerable and incentivize the working
age population to participate in the labor force.

These include reforms that promote labor force participation of women and
the elderly (Japan), and that strengthen pension systems (Thailand).

To boost productivity growth, the report recommends reducing regulatory
burdens and promoting competition in the service sector (Korea), and
minimizing tax distortions to improve resource allocation to productive
firms (Philippines).

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